EI: Do Not Invest Here

You probably should not invest in this company. Not for a reason like flawed logic (if anything, Sham makes many strong points and I like his overall style) but because a great investment idea isn't shared on a public forum like a blog.

If it were a great idea, Sham would be buying up shares and shares of the company, rather than sharing the idea. Even the great Buffett doesn't disclose the companies he's actively investing in... he only discloses after a certain period because it's required by the SEC. But Buffett gets a delay on required disclosure when he's still buying shares of companies... so what this all tells me is that even if Sham is being nice and sharing a good idea, it's definitely not a great idea. And that means you probably shouldn't invest in Ternium Steel.

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EI: Notes on Warren Buffett Meeting

Students from Emory and UT Austin had a Q&A with Warren Buffett and here are some notes on the highlights. Definitely worth 10 minutes of your time.

And here's the link to Warren Buffett's most recent letter to shareholders (2007).

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EI: Bad Call, Alan!

Enough said...

EI: Chance and Probability

We've talked about luck before, how it relates to setting goals, and pointed readers to a book review of The Black Swan but (based on what we remember) we've never discussed the role of chance when it comes to investing. So here's a great piece from the insightful Epicurean Dealmaker and a quote to entice you to click through:

Investing is clearly a game that is far more complex and subject to dramatically more causal factors than tossing a coin. However, no sane person would deny that chance must play some sort of role in an investor's results. Baruch identifies a factor he calls "persistence" in a trader's superior returns. Does that mean that outcomes in sequential investing games are not independent? That winners tend to win? If so, why? Is this the result of skill, momentum, reputation, confidence?

Or are we looking at a dramatic case of survivorship bias, where the most successful (lucky) investors are the few among many that we focus on, send money to, and try to emulate simply because they have been successful? Are these wizards of finance only one or two coin tosses away from failure, ignominy, disgrace?

EI: "Disasters"

A strong piece from the New Yorker on the price we pay for innovation. Money quote:

The situation illustrates a fundamental paradox of today’s financial system: it’s bigger than ever, but terrible decisions by just a few companies—not even very big companies, at that—can make the entire edifice totter.

"EI": Financial Papers

Part of what I believe encompasses being a successful investor means keeping up to date on the latest developments in finance/financial theory. Therefore, I dutifully point you over to this post that quickly summarizes some recent finance related papers.

Another recommended method of "keeping up" that perhaps should come before diving into these papers is reading Capital Ideas Evolving, a neat and informative book on the major developments in financial theory over the past 40 or so years. Warning: this book some heavy hitting stuff that'll take a while to get through but that has helped this author immensely in the financial markets.

If you're looking to improve your ability as an investor, it will only help to make the book a reading priority for 2008. Get started now!

Everything Investing: 2 Years of Results

I've been investing for a few years, but I'd like to share how I did in my first two full years of investing. Perhaps these results will help drive more readership in our Everything Investing series though I'll warn that I never give out my stock picks or specific ideas:

76% overall return for my portfolio for the full year 2006 vs. 15% for S&P 500

21% overall return for my portfolio for the full year 2007 vs. 3.5% for S&P 500

Now I know benchmarking against the S&P 500 isn't the perfect way to measure one's investment success (believe me, there are many other indexes, risk adjustments to make, etc) but it's a very good track record when you look at the CAGRs of the greatest investors:

• 29% for 37 yrs. - George Soros
• 21% for 40 yrs. - Warren Buffett
• 29% for 18 yrs. - Eddie Lampert
• 29% for 18 yrs. - Peter Lynch
• 24% for 13 yrs. - Jim Cramer
• 15% for 20 yrs. - Benjamin Graham

Here's the source for those numbers.

And though I'm not anywhere close to them in terms of sustained performance, here's mine:

~46% CAGR over 2 years

Here's to a Happy New Year and many more years of high investment returns!

Everything Investing: 2008's Possible Improbables

Interesting post over at The Big Picture on 2008's Possible Improbables.

The list below:

Kass' 20 Surprises for 2008

1. The Housing Depression of 2007 morphs into the Retail Spending Depression of 2008.

2. Corporate profits drop by 10% in 2008.

3. The S&P 500 Index falls by 5%-10% in 2008.

4. Volatility pushes even higher. Daily moves of 1%-2% become commonplace.

5. The Federal Reserve eases monetary policy in 2008, with nearly every meeting accompanied by a 25 bp cut.

6. Growth in the Western European economies deteriorates.

7. The Chinese juggernaut continues apace. Chinese stock market doubles again in 2008.

8. The Japanese market puts on a surprising resurgence.

9. The housing bust accelerates. High profile bankruptcies in 2008 include Countrywide Financial (CFC), Beazer Homes (BZH), Hovnanian (HOV), Standard Pacific (SPF), WCI Communities (WCI) and Radian Group (RDN).

10. Financial stocks fail to recover.

11. Research in Motion (RIMM), Apple Computer (AAPL) and Google (GOOG) move into bubble status and their shares double in 2008.

12. Yahoo! (YHOO) and eBay merge. So do Amazon (AMZN)and Overstock.com (OSTK).

13. General Electric (GE) will sell NBC Universal to Time Warner (TWX), which will not sell or spin off AOL.

14. U.S. dollar's value falls by over 10% in 2008; Gold rises to over $1,000/oz.

15. The price of crude oil eclipses $135/barrel.

16. Acts of cyberterrorism occur that compromises the security of a major government. Financial markets will be exposed to hackers.

17. The Hedge fund community are disintermediated in 2008. Outflows accelerate.

18. There are several Enron-like accounting scandals in 2008.

19. Democrats Clinton/Kerrey and Republicans McCain/Crist represent their parties in the Presidential/Vice Presidential contest in November. Democrats grab the White House.

20. Sovereign Wealth Funds become targets of American politicians.

Everything Investing: Moats

Well, it's not quite that easy to invest like Mark, but follow through this link to get to the excellent speech. While we disagree with a few of Mark's points, this one certainly rang true:


The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting. One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot or Lowe's. Another source is the network effect, a la eBay or Mastercard or Visa or American Express. A third would be intellectual property rights such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here. A fourth and final type of moat would be high customer switching costs. Paychex and Microsoft are great examples of companies that benefit from high customer switching costs.


That passage is an excellent example of the types of companies you should be looking to invest in and yet something is missing: the fact that you need to identify these companies, and their moats, before others if you plan on making an excellent investment.

Everything Investing: Volatility Inspired Opportunity

Now this is something we've been onto for some time regarding our investing style. It's good to see there are people out there who can keep a level head when everyone else is panicking. One more distinction we'd like to add: not every market drop is a prime opportunity to invest. Sometimes a company's fundamentals really are deteriorating, in which case a plummeting stock price would not present a prime investing opportunity. In those situations, it's like trying to catch a falling knife.

Everything Investing: Quiz of the Day

1) Why do these factors matter so much when looking for a stock set to appreciate?

- Improving operating margins
- Sales growth
- Free cash flow
- High return on equity
- Insider ownership levels
- Earnings growth

2) Also, are there any other key factors?

Bonus) What book did we last review on this blog?

And for reference, head over to investopedia if you don't recognize any of these terms or concepts. The next "Everything Investing" post will answer these questions...

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Everything Investing: Intuition and Hard Work

Do you have a "knack" or "intuition" for investing?

This one is tough to answer unless you're willing to risk some capital. While it's great that there are more and more investing simulation games, there are also limits to these games in finding one's intuitive abilities. For example, in a game you will make a different decision (I promise) when the market is volatile than when you're risking your own capital and have your skin in the game. So to find out if you have a "knack" or "intuition" for investing, you probably need to jump into the markets with your actual money. Important thing to remember: most people don't have this innate ability.

What do you do once you've discovered you have good intuition?



This is where the hard work comes in because now you need to build upon your natural abilities (and you can't coast). Ability and luck only take you so far; hard work does the rest. I can only speak for myself, but I work hard to grow the depth and breadth of my investing knowledge by doing a few things that I enjoy (enjoying all of this is a key to success as well, otherwise this part is torture).



What does the hard work include?

- Reading annual reports of companies that strike me as interesting potential investments.

- Reading investment and business books, but also reading books on technology, pyschology, history, and strategy.

- Reading a lot of magazines and newspapers (I prefer WSJ and The Economist for general news and then a host of other magazines, websites, and blogs for ideas).

- Secret sauce/luck.

And what about luck?

Our views are here.

What authority do you have to speak as an investment pundit?

I'm not a pundit. I don't even like that word! I'm just giving advice based on what's worked for me though it's always good to take advice with a grain (or two) of salt. But you can't go wrong with the general message of this post: always work hard, always try to improve, always be open minded, and realize some or all of success is due to luck.

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Book Review: "The Little Book That Makes You Rich"

Well, I had just finished writing a long review on The Little Book That Makes You Rich when Blogger decided to mess up and lost the entire post. I'll do a quick recap instead:

This book is a 7 out of 10 for a few reasons:

- It is quick: I finished in an hour and a half and experienced investors can just flip through to parts of the book they'd find interesting.

- It is formulaic: you can see how Louis Navallier invests and what he looks for in investment opportunities.

- However, I am skeptical of his free resource at getrichwithgrowth.com. You can't just rely on the numbers to find a good opportunity and as more people find out about his method it just causes diminishing returns. Take the resource (and results) with a grain of salt.

So what can we learn from a book like this (other than the title makes me gag)? Well, it's important to have a consistent approach to investing. Don't flipflop on your approach, much less the companies you invest in. Conviction is key; with that in mind, absentminded stubborness is dangerous.


A hint: the entire series of "The Little Book of..." books are excellent and I have read them all multiple times (check it out in our Book Reviews). However, the one I still like best is The Little Book of Value Investing.

Interestingly enough, my personal approach is a consistent mix and something I'd just characterize as Opportunistic Investing. But, unfortunately, I can't give away all my secrets...

Everything Investing: Hedge funds = bonds

Thanks to Abnormal Returns for the source of this post, which is actually just the image you see on the right. One key thing to note is that the risk adjusted return is likely much lower as well, so in the end you were better off investing in bonds (if you had the choice) starting in January 2006.

This goes back to the advice we gave earlier that no one has been able to time the market consistently. An additional piece of advice that goes hand in hand with the timing advice is that very few people can beat the market consistently. The hedge fund index performance on the right backs up that claim.

Addendum: Found out the original source and article for this graphic.

Do You Pay the "Book Tax"?

Sometimes I save on my reading expenses by occasionally going to the bookstore, grabbing a good book, and paying the book tax. I pay my book tax by buying an overpriced coffee drink as a way to tax my (occasional) squatter reading habit. But how do book stores come out ahead? Do you pay the book tax? And if people are reading books for free, does this mean book stores are generally a poor investment? Well, the occasional super best selling book does seem to help, but that's only a temporary boost. Take note:

Of course, all of these companies reduced prices on Deathly Hallows to lure in customers, hoping that the extra traffic would push more transactions for other items... As I've said before, booksellers don't seem like terribly exciting investments to me right now, given Amazon.com's huge and formidable presence in an already fierce competitive landscape.

Reading a book for free, but still paying the book tax, can lead to a win-win situation. The consumer wins because they pay less than they would buying the book. The company wins because they get the customer in the store (more on this in a second) plus in the book tax situation they're getting higher margins by selling coffee than by selling the book.

Loyal squatters will occasionally actually buy a book or two after also paying their book tax, either because they feel bad or because the book is just that good, and the bookstore gets a nice boost all around. So the ability to get the customer in the store via the right to read for free becomes an important strategy.

Yes, bookstores might have the occasional visitor who reads for free and doesn't pay the book tax, but for the most part consumers either buy books without reading other books in the store or they use the blend approach by paying the book tax and occasionally buying other interesting books. Barnes and Noble sold over 300 million books last year with their retail and internet operations combined and stores represent 96% of their retail sales (according to their website) so they're definitely still moving books.

Searches on Google never led to an official policy from B&N or Border's on book squatters, though Border's does talk about Discovery being one of their values. The reading for free technique still works for the bookstores but not well enough compared to Amazon and other internet book resellers that do not have to deal with the squatter issue. Brick and mortar booksellers provide a great community resource but because of this they're not likely to be a great place to allocate one's investing capital when compared with the internet book resellers.

There are still some lingering questions. What did people do before bookstores began allowing squatters? What would happen if these stores ever stopped allowing reading for free? Would Amazon take away even more of the book retailing market? And how do libraries play into this discussion?

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Everything Investing: Don't Panic

No one has been able to time the market consistently (profitably). A look at this chart should show you why it's so difficult. Talk about volatility!

Very few people are in the black right now (on a Year-To-Date basis) which is why it's very important to follow some Hitchhiker's Guide To The Galaxy Advice: Don't Panic.

That's actually good advice for such volatile markets if you're like most people - a long term investor. Unless you're a day trader, or really know what you're doing, volatile markets can often present the best buying opportunities. Remember - be careful, do your homework, and if everything still makes sense - be patient and don't panic.

Addendum: I added Berkshire to the comparison chart because of all the talk on Warren Buffett. Don't interpret it as a buy recommendation or anything else - it's just an interesting point of reference for the chart.

Addendum 2: Reports say the markets are going to open sharply lower today, after yesterday's extremely volatile trading. I try not to get caught up in the day to day news of the market except when volatility presents buying opportunities.

Everything Investing: A look at Sham Gad

I got an interesting request last week from a pal to start a blog related to investing. While I generally like the idea, I decided with the various things on my plate (M&A work, running College Knowledge, running the CK blog, researching my own investing partnership, reading, etc) that it would probably be stretching me a bit thin. Instead, I think the next best thing is to write an ongoing series of investing related posts under the title "Everything Investing".

My thinking behind adding investing to the topics covered in this blog (wide ranging topics within education and life) is that everyone should have some sort of basic knowledge of investing. Indeed, it's not too hard to learn, it can be fun, and best of all you can make money. To do so, however, requires dedication, patience, and confidence coupled with occasional outside the box thinking.

So for the first post in the "Everything Investing" series, I want to turn your attention to Sham Gad. Sham is an (unfortunately) UGA b-school graduate who follows a Buffett/Munger/Pabrai/value approach to investing. The best place to read about Sham is at his blog. I suggest reading through the value investors library on his blog as well as reading through some of his later blog posts. I get a good vibe from Sham and have felt comfortable enough trading emails with him and even posting some honest comments on his blog. While he has no public track record, he seems wise and should be a formidable investor for quite some time if he can stick to his guns running Gad Capital.

So anyways, we've covered Munger on this blog before (you can find the link right here) and I've book reviewed Buffett's biography so it's not hard to see these famous investors have influenced me as well. And if you go to Sham's blog, you'll see the two investors have influenced him strongly. I strongly recommend a value approach to investing, particularly for beginning investors, and a great book to start you off is the Little Book of Value Investing. For a more passive approach to investing, I strongly suggest the Little Book of Common Sense Investing, which I've book reviewed before right here.

Addendum: If you have any investing related questions, please feel free to send emails or post comments. I'm willing to answer investing questions in addition to education, career, and life questions, so don't be shy!